The United States

During the past seven decades, the number and size of state and local government
economic development programs has grown rapidly in the United States. This
recent growth, however, has old roots.

Early American governments actually maintained incentive programs that would
look familiar today. In the book "The Rise of the Entrepreneurial State: State
and Local Economic Development Policy In the United States," author Peter K.
Eisinger (now a Wayne State University political scientist) describes the
nation’s first "industrial park" — in other words, land set aside for a
particular commercial use, such as an industry-specific business site. In 1791,
New Jersey incorporated a private company established by founding father
Alexander Hamilton and provided it with a "state tax exemption, a grant of power
to condemn property for its own use and control over much of the water supply of
northern New Jersey. …" The company, in turn, established an industrial park
near the Passaic River.[1]

Such efforts were not limited to New Jersey. Political scientist Terry Buss of
the National Academy of Public Administration has performed an academic
literature review of economic development programs in the United States.[2]
He reports that by 1844, the state of Pennsylvania had invested more than $100
million in the operations of private corporations. The state had also "placed
directors on the boards of more than 150" of them.[3]
Corruption associated with Pennsylvania’s industrial programs led the state to
constitutionally prohibit such cozy relationships between business and
government.

Pennsylvania was not the only state to rein in early efforts at government
economic development. In 1850, the citizens of Michigan prevented the state from
investing in private business or from running state commercial enterprises in
the name of "internal improvements" (as infrastructure development was then
known). Specifically, the new state constitutional language read, "The state
shall not subscribe to or be interested in the stock of any company,
association, or corporation."[4]

The modern era of economic development programs began in the wake of the Great
Depression, when southern states, desperate to improve their employment
prospects, offered relocation incentives to northern manufacturers. Industrial
policy scholars are almost unanimous in locating the beginning of that era in a
program created by the impoverished state of Mississippi.

According to an online history publication of the Mississippi Historical
Society, Mississippi entered the Great Depression as America’s poorest state.[5]
Connie Lester, a historian at Mississippi State University, explains in an
article on the Web site that the state’s industrial jobs fell by 46 percent
between 1929 and 1933 alone. Its bank deposits were effectively halved, and farm
income fell by 64 percent.[6]

In 1936, the state passed the Mississippi Industrial Act to facilitate Gov. Hugh
White’s program to "Balance Agriculture with Industry." White was the former
mayor of Columbia, Miss., where he had successfully lured the Reliance
Manufacturing Company, a maker of garments, to build a new plant providing 300
new jobs for the area. White’s maneuver involved using the voluntarily provided
collateral of private citizens to obtain a bank loan to finance the construction
of the building that the company had demanded in exchange for the new jobs.

As governor, White wanted to facilitate similar arrangements in communities
across the state, but he viewed the private voluntary efforts of citizens as
being ineffective.[7]
The Balance Agriculture with Industry program officially authorized units of
local government to engage in targeted economic development strategies,
primarily by allowing officials across Mississippi to employ voter-approved
"Industrial Development Bonds." These IDBs allowed the government to issue bonds
that were to be paid off using tax revenue and other income derived from the
project that they were sold to induce.

Under Gov. White, a three-member team ran the program by advertising its
existence and by issuing "certificates of public convenience and necessity" that
allowed local units of government to get bond sales approved by voters. The team
also distributed and collected information from firms interested in special
financial treatment.[8]
According to Lester, the commission for the program reviewed more than 3,000
applications and whittled the first approvals to sell bonds on behalf of firms
to 21. Of these, 12 firms opened plants in the state of Mississippi.[9]
Real Silk Hosiery of Indianapolis, Ind., was one of those companies, and with
its move to Durant, Miss., it was later credited as the very first firm to
relocate as a result of modern, targeted industrial incentives.

In November 1998, Time magazine profiled this company and the city of Durant in
a special investigation titled "What Corporate Welfare Costs."[10]
The article is worth quoting here at length:

The town of Durant (pop.2,500), a farming community with
more sidewalks than paved streets, was offering to issue $25,000 in
industrial-revenue bonds to buy land and erect a 15,000 square foot building,
which it would lease to Real Silk for 25 years for all of $5 a year. In
addition, Durant would waive five years of county taxes on the building and
property taxes on the machinery. On top of that, the city would provide
insurance, set up a training school and even erect housing for workers. In a
front-page editorial that sounds eerily familiar, the Durant News crowed that
that the project was a great deal for the town. In a special election, the
town’s voters approved the bond issue, 330 to 19. The people of Durant were in
the hosiery business.

By the mid ‘50s, all that came to an end. Before the
first bond was due to be paid off, Real Silk shut all its factories, including
Durant, sold off the equipment and became an investment company. The lesson, one
that has been lost on generations of mayors, governors and presidents, is that
capital ultimately ignores such incentives. It seeks its highest reward as
dictated by market forces, not political ones. The building that was to put
Durant on the industrial map still stands — empty.

And Mississippi? It was the poorest state in the nation
when its corporate-welfare program began in 1936. Today [1998], 62 years and
hundreds upon hundreds of millions of dollars in economic incentives later, it
remains dead last in per capita income.[11]

Thus, Mississippi’s experience with the first modern government economic
development project foreshadowed some of Michigan’s worst projects. Still, as
economists John Anderson and Robert Wassmer note, "By the 1960s, most states had
authorized the use of IDBs in some form to attract business investment."[12]
As mentioned in the introduction to this study, one scholarly estimate puts the
cost of all state and local incentives provided to corporations every year at
$48.8 billion (in constant 1996 dollars),[13]
while a second tallies the annual value of state and local incentives
distributed in the name of economic development at $50 billion.[14]

Michigan

Gov. Kim Sigler

The state of Michigan entered the economic planning arena in 1947 under the
recommendation of Gov. Kim Sigler. Sigler, a Republican, was the first of the
modern Michigan governors to propose a state-level economic development
department. His proposal would eventually become Public Act 302 of 1947, which
created the "Department of Economic Development." The department received a
first-year appropriation of $75,000.[15]

In his first State of the State address, Gov. Sigler criticized an existing
state agency known as the Michigan Planning Commission, created in 1937.[16]
He then proceeded to explain why he preferred an agency with "proper powers,"[17]
whose objective would be to collect economic information through surveys; study
the information; recognize trends in such things as employment, production and
the use of resources; and distribute such information as was necessary to help
with business and industrial opportunities in Michigan. The aim of the new
program was to encourage "growth and diversification of agriculture, industry
and commerce in Michigan."[18]

Gov. Sigler also discussed two other economic development approaches programs:
the first to establish "a working committee of research talent in all State
agencies, colleges, and institutions, to coordinate the state’s research in
economic fields and utilize all of its research facilities in economic
development";[19]
and the second to create a coordinated advertising program to let businesses in
other states know that Michigan was a good state in which to locate their
facilities.[20]

Thus, Gov. Sigler’s programs anticipated those of later Michigan governors. The
concerns he expressed in establishing the programs sound modern, as well:

For example, many of our furniture factories have left
Michigan; Grand Rapids and other cities are well aware of this fact. One of our
greatest corporations is building fourteen new plants — seven of them will be in Ohio but none in Michigan. Western and Southern states particularly are doing their utmost to lure industry from Michigan.[21]

Indeed, today’s officials are still worried about furniture makers leaving
Michigan and losing jobs with our greatest corporations to the South and West.
Since the 1995 inception of the state’s Michigan Economic Growth Authority, the
state has offered two of Michigan’s furniture makers more than $38 million in
Single Business Tax relief in four deals designed to prevent them from choosing
North Carolina, Tennessee or Indiana, among other states, for their new or
expanded operations.[22]

Gov. George Romney

Since the passage of Gov. Sigler’s program, states have dramatically increased
the size and scope of their industrial policy programs. Including Gov. Sigler’s
foray, about eight major institutional changes have been made by Michigan
governors to the state’s economic development programs.

The second major programmatic change in Michigan came in 1963, under the
leadership of Gov. George W. Romney. As a much younger man, Romney had been a
key member of Sigler’s commission of economic development, which oversaw his
Department of Economic Development.[23]

As governor, Romney signed Public Act 116 of 1963, which created a Department of
Economic Expansion. This department was charged with the "carrying out of an
economic expansion program for the state" and required to "aid the creation of
new job opportunities, encourage the expansion, development and diversification
of industry, commerce, and agriculture, and the bringing of new industry to this
state."[24]
Gov. Romney’s economic expansion program listed 10 specific activities in which
the department should engage. Seven involved additional research and
investigation, and two involved advertising the economic and cultural virtues of
Michigan.[25]

Thus, there were a number of parallels between Gov. Romney’s and Gov. Sigler’s
programs. Gov. Romney’s concerns over economic diversification echoed Gov.
Sigler’s. And as noted above, both governors called for more study of the
economy, more research into the state’s resources and more publicizing of
Michigan’s virtues.

Gov. William Milliken

Gov. William Milliken held office from 1969 to 1983. He, too, employed state
resources in an attempt to market Michigan to outsiders and to create and retain
jobs.

In 1975 he signed into law Public Act 301, which specifically noted, "There is a
statewide pressing need for programs to alleviate and prevent conditions of
unemployment."[26]
The act created the Michigan Job Development Authority, located within the
Michigan Department of Commerce, and allowed the state to sell bonds in order to
raise money for private, for-profit businesses.

The law distinguished itself from its predecessors by emphasizing wise energy
use and environmental protections. As Gongwer News Service described it, "Under
the bill, the Authority is authorized to issue general obligation bonds to
finance projects of an industrial nature — including projects dealing with air
and water pollution control facilities and solid waste disposal facilities —
which offer adequate job development potential."[27]

The law’s basic approach, however, was the same as that of the two major
programs championed by Govs. Sigler and Romney. Under Gov. Milliken, the
authority sought to "preserve existing jobs and create new jobs"[28]
and "diversify the Michigan economy"[29]
for the "public purpose of alleviating and preventing unemployment by the
retention, promotion, and development of industrial buildings. …"[30]

The Gongwer News Service also noted that the bill’s own sponsor, state Sen.
Anthony Derezinski of Muskegon, patterned the law after similar legislation in
New York and Connecticut. Derezinski argued that retail businesses should not be
included in the act because they "do not create a great number of new jobs."[31]

Despite the act’s attempt to target industries that legislators found promising,
Michigan’s overall economy did not necessarily improve. As the national
recession and increased competition from foreign automakers took its toll on the
state’s economy, Gov. Milliken reacted by instituting Michigan’s fourth major
change in state economic development policy, with the passage of Public Act 326
of 1982.

This new program emphasized "expanding Michigan businesses and centers of
excellence in biotechnology and advanced manufacturing."[32]
To this end, the law created the Michigan Economic Development Authority, which
was empowered to extend loans to targeted businesses selected by the authority’s
representatives. According to an MEDC review of economic development programs in
Michigan, MEDA provided grants and financed loans to targeted businesses. MEDA’s
revenues came from state money derived from oil and gas lease payments.

The mixed results of MEDA’s first projects foreshadowed those of MEGA (see "Case
Studies" under "MEGA's Track Record"). These projects, as Gongwer News Service reported on Nov.
13, 1982, were quickly implemented through loans to James Heddon’s Sons Inc., a
maker of fishing lures; Bay Breeze Industries (now Lloyd/Flanders), a lawn
furniture manufacturer in Menominee; and Gougeon Brothers Inc. of Bay City.

James Heddon’s Sons no longer does business in Michigan, though it once employed
as many as 200 people.[33]
The company was bought out, and it closed its Michigan operations on Aug. 9,
1984, moving its production activities from Dowagiac, Mich., to Fort Smith,
Ark., less than two years after the state loaned it money. The factory would
remain vacant until 1991,[34]
when it was purchased by Don and Joan Lyons and converted into the Heddon
National Museum.

The second company, Bay Breeze Industries, was approved for a loan, but
according to company spokesman Jeff Starks, "MEDA never came through."[35]
Starks was employed by Bay Breeze at the time (and is still employed by
Lloyd/Flanders), and he recalls that the company eventually refused the MEDA
loan for two reasons. First, the requirements of the loan were too restrictive
and required an inordinate amount of paperwork. Second, by the time a loan
disbursal might have been made by the state, it was nearly too late for the
company to employ the loan monies in the way it had envisioned.[36]

The third company, Gougeon Brothers Inc., remains in business today. Meade
Gougeon, of Gougeon Brothers Inc., recounted to us the events that led to the
loan.[37]

The company acquired a plant for making wind energy blades in either late 1981
or early 1982. According to Gougeon, few investors understood the alternative
energy business, especially as it related to wind power, and bankers had little
interest in the project. The brothers turned to the state’s MEDA program for an
approximately $500,000 loan to renovate their company’s Pinconning-area
facility.[38]

At first, the new business venture fared very well, employing about 75 people.
Unfortunately, the market for wind energy fell out in 1986, bankrupting two
primary customers and very nearly Gougeon Brothers, too. Over the next six
years, employment at the Pinconning plant was whittled to approximately 15
employees, and the wind energy blade work was largely supported by
cross-subsidies from other Gougeon business. In 1993, after producing almost
5,000 wind blades, Gougeon’s wind energy business was sold to the firm Atlantic
Orient, which went bankrupt about a year later.[39]

There was a silver lining. In order to produce top quality wind blades, the firm
created a laboratory that allowed them to run a variety of difficult tests
involving fatigue issues in the area of polymer performance. Over the years, the
firm’s expertise in this field helped them win contracts with very large
customers, such as Boeing Corp., the National Aeronautics and Space
Administration, and Scaled Composites, the maker of SpaceShipOne, the privately
financed space vehicle that recently made headlines.[40]
To Gougeon’s great credit, despite the economic troubles it faced in the product
area for which it received its MEDA loan, the firm repaid its MEDA loan in full.[41]

Gov. James Blanchard

Despite Gov. Milliken’s efforts, Gov. James Blanchard inherited a deeply
distressed economy in 1983. In his first State of the State address, Gov.
Blanchard indicated that the economy was his highest priority, saying, "We must
rescue the state of Michigan from bankruptcy."[42]

According to the address, two of Gov. Blanchard’s first acts as governor
included executive orders making economic recovery and job creation a critical
administration objective. The second of these orders created an economic
development and job creation council to create a plan for guiding "the
participation of state government in economic development and job creation —
focusing the resource of state government. …"[43]
Part of the governor’s longer-term strategy was a state branding campaign — "Say
Yes! to Michigan" — which used media
advertisements to promote the benefits of living and working in the state. This
strategy echoed the earlier advertising efforts of Govs. Sigler and Romney.

In 1984, Gov. Blanchard championed the fifth major program change in state
government economic development with the creation of the "Michigan Strategic
Fund" under Public Act 270. The new law rolled the duties and rights of Gov.
Milliken’s two previous programs, MEDA and the Michigan Job Development
Authority, into the new Strategic Fund. According to Gongwer News Service, the
Strategic Fund, like its predecessor agencies, was "designed to aid new and
expanding businesses" by offering "loan guarantees, bond guarantees, and loans
to expand public works to serve business expansion."[44]

The Strategic Fund’s powers were broader than previous programs and were
explained in a 14-part provision of the law creating the fund. Those powers
included, but were not limited to, soliciting and accepting gifts and grants;
making grants; constructing or assisting in the creation of a project; borrowing
money; issuing bonds; acquiring and disposing of property; investing fund money;
and making loans.[45]
According to a state House Fiscal Agency report at the time, the Strategic
Fund’s purpose also included diversifying Michigan’s economy, thereby reflecting
the concern with diversification expressed by Govs. Sigler, Romney and Milliken.

Gov. John Engler

The establishment of the Strategic Fund in
1984 was strongly opposed by then-state Senator John Engler. For the purpose of
historical perspective, Sen. Engler’s remarks on the floor of the Michigan
Senate are worth quoting here at length:

There’s been a desire on the part of the Republican
Caucus of the Senate to relate to the Strategic Fund, which is a government
oriented solution to the structure of our programs. I presume, and a government
solution to problems of unemployment — of an unemployment rate in Michigan
that’s four points more than the national average. It is an effort on the part
of the state to venture into the marketplace to find those companies that some
people in this body, some people in state government, deemed to be worthy
companies of state investment but unable to attract any private capital
investment.[46]

He later continued:

There are others who feel that the passage of this
legislation gives a tool to the state that will help this state do more for
business than it’s done before. One of the fundamental flaws in that reasoning,
though, and in the faith placed in government by those sponsors, is that they
assume that government — whether the incoming Department of Commerce Director,
Doug Ross, or the outgoing director, Ralph Gerson, or the Board of this new fund
if it is to be created, or state Department of Commerce civil servants, or
Department of Treasury civil servants, or others exempted from Civil Service —
might somehow possess the judgment and the insight and the skill and the
financial expertise unavailable in Michigan’s financial community, unavailable
in Michigan’s venture capital firms, unavailable in the pension fund management
of the state’s $400 million plus pension programs.

These proponents of this legislation argue that rather than treat everyone in
the marketplace or everyone who might wish to come into the marketplace
equitably by dealing with Michigan’s oppressive tax burdens that we should
instead simply set up business to become their partner in order to help overcome
the tax burdens.

Well, that works fine if you are a friend of government, if you’re a friend of
the current administration, if you know somebody, or if you can get to know
somebody or if you can hire the right lobbyists, or if your legislator is in the
right place, or any other number of keys that sort of unlock the magic door that
controls these funds. That’s a very inefficient way to do business in my
judgment.

And, finally:

The logic of that escapes me. How does that benefit
Michigan business? How does that deal with tax burdens? How does that deal with
regulatory reform? I understand what it does for politicians, but I fail to
understand what it does for Michigan business as a whole. I understand what it
does for specific people, specific businesses who have the good fortune to know
somebody as I have described, but I fail to understand what it does for somebody
who simply has a good idea in the back of his garage and doesn’t know anyone. It
doesn’t seem to me it helps at all.[47]

Despite his past criticism of state economic development programs, Gov. Engler,
elected in 1990, reorganized and increased the depth and breadth of government
economic development programs. He made his biggest changes in 1995 and 1999.

In 1995, the Michigan Jobs Commission was given full departmental status.
Previously it had been a temporary agency that served as a central location to
collect and deposit most of the state’s disparate economic development programs.
According to the nonpartisan state Senate Fiscal Agency, the MJC saw 50 federal-
and state-subsidized development programs relocated to, or combined in, this
department.[48]
One of these programs was the newly created Michigan Economic Growth Authority,
which is the subject of this study.

In 1999, Gov. Engler split the Michigan Jobs Commission into two parts: the
Michigan Department of Career Development, and the Michigan Economic Development
Corporation. The MDCD’s duties involved job training and collection and
distribution of labor statistics. The MEDC, in contrast, became a quasi-public
independent corporation that maintained programs designed to facilitate the
creation of new jobs and to help keep existing jobs in the state. MEGA was
placed under the auspices of the MEDC.

Gov. Jennifer Granholm

In 2003, Gov. Jennifer Granholm chose to combine again the MEDC and the MCDC
under the umbrella of the Department of Labor and Economic Growth. The DLEG was
created to help with "centralizing and streamlining
the state’s job, workforce, and economic development functions under one
department,"[49] according to a Granholm
administration press release. The MEDC, however, still retains its quasi-public
corporation status.

In her 2005 State of the State address, Gov. Granholm
has advanced the idea of borrowing an additional $2 billion to invest in
research in life sciences and automotive ventures, particularly in those fields
being explored by researchers at state universities. She has titled the program
the "21st Century Jobs Initiative" and envisions it diversifying the economy and
facilitating the commercialization of research in which universities are already
engaged.[50]
She projects that her new program will create 72,000 new jobs.

Gov. Granholm’s interest in promoting life sciences
and automotive research recalls Gov. Milliken’s emphasis on biotechnology and
advanced manufacturing. Her proposal also echoes the goals of Gov. Blanchard’s
Research Excellence Fund (established during his tenure as a branch of the
Michigan Strategic Fund). These goals are summarized in an April 30, 1985
Blanchard administration news release:

[T]he function of state government is to act as a
facilitator in encouraging more interaction between higher education
institutions and the private sector. Closer ties between the two can result in
increased business and job creation. The Research Excellence Fund will make
targeted investments in the existing strengths of our colleges and universities
in those fields which hold the most potential for future economic benefit for
all of Michigan.[51]

Gov. Granholm also used her State of the State
address to explain that her administration would move up the scheduled spending
of an already approved $800 million in bond revenue on public works projects.
She projects that this spending will "create 36,000 jobs in the next three
years. …"[52]
Gov. Granholm said the money would be used to "repair roads and bridges," "build
affordable housing," and "fix deteriorating campus buildings."[53]

This effort is likewise reminiscent of a proposal by
Gov. Blanchard. In 1983, he proposed an $800 million public works program that
he projected would create 60,000 jobs for youths and 20,000 summer-only public
works jobs for skilled workers.[54]
Of the $800 million in spending, $300 million was to be funded in part by the
sale of bonds and used to improve housing, railroad tracks, roads and bridges.

[1]
Peter Eisinger, The Rise of the Entrepreneurial State: State and Local
Development Policy (Madison, Wisc.: The University of Wisconsin Press,
1988): 15.

[2]
Terry F. Buss, "The Effect of State Tax Incentives on Economic Growth and
Firm Location Decisions: An Overview of the Literature," Economic
Development Quarterly, 15:1 (2001): 99.

[8]
Ibid. Lester notes that Mississippi actually advertised its program at one
point by referring to the large pool of "Anglo-Saxon" workers. Apparently
the Balance Agriculture with Industry program was a whites-only industrial
policy.

[12]
John Anderson, and Robert Wassmer, Bidding for Business: The Efficacy of
Local Economic Development Incentives in a Metropolitan Area (Kalamazoo,
Mich.: W.E. Upjohn Institute for Employment Research, 2000): 5.

[13]
Kenneth P. Thomas, Competing for Capital: Europe and North American in a
Global Era (Washington, D.C.: Georgetown University Press, 2000):
159-160.

[14]
Alan Peters and Peter Fisher, "The Failures of Economic Development
Incentives," Journal of American Planning Association. 70:1 (2004);
28.

[15]
F. M. Alger, Jr., Public and Local Acts of the Legislature of the State
of Michigan, (Lansing, Mich.: Franklin De Kleine Company, State
Printers, 1947): 473-475.

[16]
Gleaves Whitney and William Cron, ed., "Kim Sigler’s 1947 State of the State
address," Messages of the Governors of Michigan,Vol. 6
(2004): 248. "We have in this state an agency created by the Legislature of
1937, known as the Michigan Planning Commission. …"

[22]All MEGA Projects, State of Michigan, Michigan Economic Development
Corporation e-mail to Michael D. LaFaive, December 21, 2004. The attraction
of Southern and Western states may reflect their "Right-To-Work" laws, which
allow employees to take jobs without joining an existing labor union at a
firm. In a 1996 paper, "The Effect of State Policies on the Location of
Industry: Evidence from State Borders," Federal Reserve Bank of Minneapolis
Economist Thomas Holmes explains that from 1947 — the year Gov. Kim Sigler
created Michigan’s first prominent economic development program — to 1996,
manufacturing employment in non-RTW states "is virtually the same today as
it was in 1947 and 10 percent less than it was in 1963." By contrast, RTW
states have seen a 150 percent increase in manufacturing employment,
according to Holmes (see Thomas Holmes, "The Effect of State Policies on
the Location of Industry: Evidence from State Borders," Federal Reserve Bank
of Minneapolis, Research Department Staff Report, September 1996: 2).

[31]
Ibid., "Michigan Report," Gongwer News Service (MI). Derezinski’s
desire to exclude certain industries may be the first recorded instance in
recent Michigan history of state officials explicitly favoring some
industries over others.

[32]
Timothy Bartik, Peter Eisinger and George
Erickcek, "Economic Development Policy in Michigan," Michigan at the
Millennium, Lansing, Mich.: Michigan State University Press, 2003: 289.

[45]
David H. Evans, ed., Journal of the House of
Representatives of the State of Michigan,"
Vol. 5, State of Michigan, Michigan House of Representatives, 1984:
1110-1111. "First Extra Session," Journal of the Senate, State of
Michigan, Michigan Senate, 1947: 12.

[46]Journal of the Senate, State of Michigan, Michigan Senate, December
6, 1984: 2483.

[50]The Detroit (MI) News, editorial staff interview, "Granholm: Without
high-tech jobs plan, state will be left in dust," sec. A, February 10, 2005.
Gov. Granholm commented on the proposal by saying, "It has to be, first of
all, a partnership with universities to commercialize ideas the universities
are engaged in. ..."

[51]
"News from the office of the Governor," press release, State of Michigan,
Office of the Governor (Gov. James Blanchard), April 30, 1985.

[52]
Gov. Jennifer Granholm, "Jobs Today, Jobs Tomorrow," State of the State
address, State of Michigan, February 9, 2005.